The nature of the municipal bond market is unlike the markets for other types of securities. Central exchanges for trading fixed income securities do not typically list municipal bonds. Market participants seeking to determine a price for buying or selling a particular bond must resort to indirect approaches that can be time consuming and imprecise. As a result, municipal bond trading, in its present form, involves substantial transaction costs as well as the risk of either overpaying for a bond or of selling a bond for less than its actual worth.
The difficulty of determining a price for a municipal bond in a decentralized market and its associated transaction costs are compounded by several other factors unique to the municipal bond market. At present, approximately 1.6 million municipal; bonds representing over two trillion dollars of debt are owed by large and small municipalities spread throughout all fifty of the United States. The bonds may be issued for general purposes, such as education or economic development, or for more specific purposes such as the building of a new school, the maintenance of a water shed, or the purchase of snow removal equipment. The bonds may have long (e.g., 30 year), short (e.g., 1 year), or intermediate maturity periods. The municipalities issuing the bonds may have credit ratings ranging from the highest quality rating (triple A) down to securities of the lowest, unrated quality. Further, municipal bonds are often purchased by “buy and hold” investors interested not only in the potential for beneficial state tax treatment of income they generate, since many municipal bonds are exempt from state taxes in their state of issue, but also in the predictability of that income. The buy and hold approach is sufficiently prevalent that roughly 80% of the trades involving a specific municipal bond are made within only three months of the bond's issuance.
Due to the vast numbers of municipal bonds and the difficulty in determining their price, firms involved in trading municipal bonds generally rely upon groups of specific individuals to conduct their trades, each having expertise and conducting trades in only a narrow category of municipal bonds. As a consequence, firms generally define trading responsibilities by region and maturity.
When an investor wishes to sell a municipal bond, other market participants will value that security. A trader in whose sector the security for sale happens to fall is responsible for determining a value for the bond. If the trader is familiar with the bond, he may be able to estimate subjectively what it is worth. If the trader is not familiar with the bond, he or she will try to discover its price. Yet, the challenges confronting price discovery are significant and time may be of the essence. Interest rates constantly change and opportunities to buy and sell may be lost due to market moves. In short, the determination of a municipal bond's price using conventional approaches is generally a time consuming process requiring investigation of numerous sources to determine a price.
In particular, to discover a price of a municipal bond, a trader will often confer or check with broker's brokers, internal trade blotters, street offerings, and price history data made available by the Municipal Securities Rule Making Board (MSRB). Ideally, the trader would like to know where identical bonds have traded in the past to make a decision about the future, necessitating a search of MSRB data, which includes information relating to approximately 30,000 trades per day, or approximately 55 per minute during nine hours of trading. That data is not available if the bond has not been traded previously, relegating the trader to the task of identifying, somehow, how similar types of securities may have been traded. At present, MSRB trade data includes the following:
MSRB Trade Data:
Message Type (message_type)
Sequential Number (seq_nbr)
RTRS Control Number (rtrs_cntl_nbr)
Trade Type Indicator (trade_type)
Transaction Type Indicator (trans_type_ind)
CUSIP (cusip)
Security Description (description)
Dated Date (dated_date)
Coupon (if available) (coupon)
Maturity Date (maturity_date)
When-Issued Indicator (when_issued_ind)
Assumed Settlement Date (if applicable) (assumed_settlement_date)
Trade Date (trade_date)
Time of Trade (trade_time)
Settlement Date (if known) (settlement_date)
Par Traded (par_traded)
Dollar Price (price)
Yield (yield)
Broker's Broker Indicator (brokers_broker_ind)
Weighted Price Indicator (if available) (weighted_price_ind)
Syndicate Price Indicator (if applicable) (syndicate price_ind)
RTRS Broadcast Date (rtrs_publish_date)
RTRS Broadcast Time (rtrs_publish_time)
Version Number (version_nbr)
Alternative trading systems (ATS's) have diminished the burden on market professionals of conducting price discovery by providing a marketplace where a plurality of individual market participants can sell and purchase bonds. Search engines have assisted traders with sifting through the vast amounts of offering data. Hampering the trader in this effort is the fact that a search must begin with a “CUSIP” for a particular security. A unique nine-digit number assigned to each security, a CUSIP is generated under the procedures of The Committee on Uniform Security Identification Procedures, an organization established under the auspices of the American Bankers Association for the purpose of developing a uniform method of identifying securities. Entry of a CUSIP would permit the retrieval of information on the circumstances of the respective security's most recent trade. ATS's typically run static pages of the offerings they have collected throughout the day, which can quickly become stale and may fail to reflect changes in the market or the movement of interest rates.
The MSRB has announced that it will publish real-time information relating to Municipal Bond trades to subscribers over the Internet or other network. (See, e.g., MSRB RTRS Price Dissemination Services, Aug. 25, 2004, Version 2.0, MSRB RTRS Price Dissemination Services Errata Sheet, Nov. 5, 2004, and RTRS Subscriber Connectivity Version 1.0, by Random Walk Computing, Inc., Sep. 2, 2004, the contents of which documents are incorporated by reference herein in their entirety). While the MSRB real-time trade feed will make trade information available with little or no delay, traders may nevertheless be overwhelmed by the data, seeing 30,000 or more trades scroll by each day, and will still need to enter searches with a CUSIP.
Accordingly, the present invention has recognized a need to provide traders of municipal bonds and other fixed income securities with a more efficient, accurate, and timely method to price bonds and to better identify prospective trades that match the trader's needs.